Q&A on the New Income-Based Repayment Option for Federal Loans

It's July 1st, which means Income-Based Repayment (or IBR) is now in effect for federal student loan borrowers.  Given the plethora of articles and websites addressing this issue recently, I thought I would try and cobble together a comprehensive guide to IBR this afternoon. 

Who are the best candidates for this method of repayment?

According to the Department of Education, the plan will will help all those with "high student loan debt relative to their income."

Will federal loans taken out prior to July 1, 2009 be eligible?

Yes.  All new and existing Stafford, GradPLUS and federal consolidation loans (excepting those that consolidate Parent PLUS loans) for graduate and undergraduate study are eligible for Income-Based Repayment (IBR). 

Are federal loans for parents, often referred to as PLUS loans, eligible for this IBR repayment option?

No. 

How do I know my income level will qualify me for this program?

The Department of Education indicates that you must have a "partial financial hardship" in order to qualify.  How is that calculated?

• Step 1:  Calculate the annual amount due on your eligible federal student loans.
• Step 2:  Calculate the difference between your adjusted gross income and 150% of the poverty guideline for your family size and state ($10,830 is the 2009 poverty guideline for family of 1 in the contiguous 48 states)
• Step 3:  Take 15% of the difference calculated in Step 2.  If this amount falls BELOW Step #1 then YOU QUALIFY FOR IBR.  

The good news is that you don't actually need to do these calculations.  Instead, use calculators provided by FinAid.org, IBRinfo.org or the Department of Education to determine your eligibility. 

What determines the maximum monthly payment required under IBR?

The following chart shows the maximum IBR monthly payment amounts for 2009 for a sample range of incomes and family sizes.  Remember that the maximum amount to be paid in an IBR plan would be 15% of your discretionary income, which is your adjusted gross income less 150% of the poverty guideline based on your family size and state. 

IBR Monthly Payment Amount
Annual Income	Family Size
	1	2	3	4	5	6	7
$10,000	$0	$0	$0	$0	$0	$0	$0
$15,000	$0	$0	$0	$0	$0	$0	$0
$20,000	$47	$0	$0	$0	$0	$0	$0
$25,000	$109	$39	$0	$0	$0	$0	$0
$30,000	$172	$102	$32	$0	$0	$0	$0
$35,000	$234	$164	$94	$24	$0	$0	$0
$40,000	$297	$227	$157	$87	$16	$0	$0
$45,000	$359	$289	$219	$149	$79	$9	$0
$50,000	$422	$352	$282	$212	$141	$71	$1
$55,000	$484	$414	$344	$274	$204	$134	$64
$60,000	$547	$477	$407	$337	$266	$196	$126
$65,000	$609	$539	$469	$399	$329	$259	$189
$70,000	$672	$602	$532	$462	$391	$321	$251

Tip:  If the maximum amount on the table above is LESS than what you would be paying under a standard 10-year repayment plan than you are eligible.

Here is an example:   If you are a recent single graduate with $22,500 (about the average indebtedness for a recent graduate) in federal Stafford loans at a 6.8% interest rate, then your monthly payment under a standard 10 year repayment plan would be about $259 (from the FinAid loan calculator).  According to the Department's IBR calculator, if you earn (adjusted gross income) LESS than $37,000 than YOU WOULD BE ELIGIBLE for IBR.  If your adjusted gross income was $30,000, your payment under the IBR plan would be $172 or $87 less than under the standard 10-year repayment. 

What should I do if I cannot make my current monthly payment while I wait to have my IBR eligibility and new monthly payment determined (bold is mine)? 

According to the Department of Education, "If you are unable to make your loan payments under your current repayment plan while we are determining your eligibility for IBR and your IBR payment amount, you may request a forbearance. During this forbearance, you will not be required to make any payments of principal or interest while we calculate your IBR payment amount, and the interest will not accrue and will not be capitalized at the end of
the forbearance."

Since they are looking at tax returns to verify income, what if my income has dropped significantly after my return was filed?  Do lenders take into account recent job losses?

According to the Department of Education, "In special circumstances when your federal tax return does not reflect your present income (for example, due to loss of employment), you may submit documentation of your current income. Your monthly payment will be based on this documented income information."

How many people might be impacted by this option?

The Project on Student Debt estimates that one million people could be eligible for this program.

Is there any scenario where I won't be required to make any monthly payments under IBR?

Yes.  If you earn below 150% of the poverty line for your family size, then your payment may be zero.  FinAid.org, IBRinfo.org or the Department of Education have useful calculators to assist you in determining what your monthly payment would be in the IBR program.

Does interest continue to accrue on my federal loan if my IBR payment is less than the monthly interest on the loan (such as the example above)? 

If you have a subsidized Stafford loan, then the government will pay the interest for the first three years in IBR.  For all of your other unsubsidized federal loans, the unpaid interest will continue to accrue. 

Can I qualify for IBR if my loan is in default?

No. 

If I have defaulted on my federal loans, how can I get my loan out of default so that I can be eligible for IBR?

The borrower needs to rehabilitate their loan, that is, make 9 on-time (within 20 days of their due date) payments over a 10 month period, in order to return the loan to current status.  At that point, the borrower could apply for the Income-based repayment plan.  For more information on how to rehabilitate your loan, here is information provided by the Department of Education. 

Assuming that I am initially eligible for IBR, what happens if in later years my income increases significantly and I am no longer facing a partial financial hardship?  Will I no longer be eligible for IBR?

According to the Department of Education: "If you no longer have Partial Financial Hardship, your payment amount will be adjusted with a maximum fixed payment amount equal to the amount required to pay your loan in full under a 10-year Standard Repayment Plan at the time you entered the IBR Plan (minimum of $50.00).” 

According to the Sallie Mae:  "Customers may remain in IBR even after they no longer qualify for PFH."

How often will my monthly loan payment be adjusted under the IBR plan?

Borrower's payment will be adjusted annually based on the adjusted gross income reported on   IRS tax returns.  While the IRS works to develop an electronic consent form, lenders are to provide borrowers with two options for income verification, based on recent guidance from the Department of Education:

"The borrower must submit to the lender a copy (including both sides) of the borrower's most recent federal tax return (Form 1040, 1040A, or 1040EZ), with an original "pen and ink" signature on the copy...The lender may continue to require the borrower to provide it with written consent to the disclosure of tax return information by the IRS. However, using the paper based consent process may result in delays in the determination of a borrower's eligibility for IBR."

When is my loan forgiven under the IBR payment plan?

If you repay under the plan for 25 years and meet certain other requirements the remaining balance on the loan would be canceled (note that the debt forgiven may be treated as taxable income).  According to IBRInfo.com (Project on Student Debt site), qualifying payments over this 25 year period would include:

• Payments made in the Income Contingent Repayment plan (ICR) before July 1, 2009.
• All payments made on or after July 1, 2009 in the IBR, Income Contingent Repayment (ICR), and Standard (10-year) Repayment plans.
• Periods when the borrower has a calculated payment of zero in IBR or ICR (this occurs when your income is at or below 150% of the poverty level for your family size).
• Periods on or after July 1, 2009, when the borrower has been granted an economic hardship deferment.

Are there any downsides to the Income-Based Repayment plan?

The press release from the Department of Education indicated one downside to the plan: 

"The lower payments may result in longer repayment periods and increased interest charges."

In other words, if a borrower could afford to pay more than 15% of their discretionary income on student loan payments, then they would be worse off if they adhered to the IBR payment schedule.  Obviously, since these loans have no prepayment penalties, a borrower can choose to pay more than the monthly payment amount if they so choose. 

How do I apply for Income-Based Repayment?

If your loan is a Direct Loan, here is the link to the Request for Information for the Income-Based Repayment Plan.

If your federal loan (Stafford or GradPLUS) is through a private lender then contact the lender directly to apply for this repayment option.  Here are links to a few of the private lenders that provide a significant volume of federal loans: 

• Sallie Mae
• Citibank
  
  • Provides application and instructions on how to apply
  • Also includes this note for those struggling to make their payments:  "Note: If your account is delinquent at the time your repayment option request is approved, we may grant you an Administrative Forbearance to bring your account up-to-date. Any unpaid interest for that period of time will be capitalized (added to the principal balance of your loan)."
  • Expected time to process:  "Please allow three to four weeks for processing, which requires us to obtain your Tax Transcript from the IRS and determine your eligibility. Until we receive all of the required information and notify you of our determination, you must continue to make your regularly scheduled payments to avoid any potential delinquency and late fees."
• Chase 
  • Indicates that any debt discharged after 25 years would be treated as taxable income:  "After 25 years, any remaining debt will be discharged and the amount will be treated as taxable income."

Public Service Loan Forgiveness Program

What about this public service loan forgiveness program?  How does it work?

If you make qualifying payments over a 10 year period and work in certain public service jobs your loan would be forgiven.

What loans are eligible for this forgiveness program?

Only non-defaulted Direct Stafford, PLUS (Parent or Grad) and Consolidation Loans are eligible to participate in the public service loan forgiveness program.  Those borrowers with loans through lenders such as Sallie Mae, Citibank and other FFEL providers would need to consolidate their loans into the Direct Loan program to be eligible. 

• Note from Department of Education:  To qualify for forgiveness of a parent PLUS loan the parent borrower, not the student on whose behalf the loan was obtained, must be employed by a public service organization."
• Since Parent PLUS borrowers are not eligible for ICR or IBR, it is not clear how they would benefit from the Public Service Loan Forgiveness Program

What are considered qualifying payments for this 10 year period?

From the Department of Education fact sheet on the Loan Forgiveness program: 

"The borrower must have made 120 separate monthly payments beginning after October 1, 2007 on the Direct Loan Program loans for which forgiveness is requested. Earlier payments do not count toward meeting this requirement.  Each of the 120 monthly payments must be made for the full scheduled installment amount within 15 days of the due date."

What repayment plans are required to qualify for this program?

Again, from the Department of Education: 

• Income Based Repayment (IBR) Plan (not available to parent Direct PLUS Loan borrowers)
• Income Contingent Repayment Plan (not available to parent Direct PLUS Loan borrowers)
• Standard Repayment Plan with a 10-year repayment period
• Any other Direct Loan Program repayment plan, but only payments that are at least equal to the monthly payment amount that would have been required under the Standard Repayment Plan with a 10-year repayment period may be counted toward the required 120 payments.

What public service jobs are included in this program?

According to the Department of Education, these jobs would qualify:

The borrower must be employed full time (in any position) by a public service organization, or must be serving in a full-time AmeriCorps or Peace Corps position. For purposes of the Public Service Loan Forgiveness Program, the term “public service organization” means –

• A federal, state, local, or Tribal government organization, agency, or entity (includes most public schools, colleges and universities);
• A public child or family service agency;
• A non-profit organization under section 501(c)(3) of the Internal Revenue Code that is exempt from taxation under section 501(a) of the Internal Revenue Code (includes most not-for-profit private schools, colleges, and universities);
• A Tribal college or university; or
• A private organization that is not a for-profit business, a labor union, a partisan political organization, or an organization engaged in religious activities (unless the qualifying activities are unrelated to religious instruction, worship services, or any form of proselytizing) and that provides the following public services
  
  • Emergency management;
  • Military service;
  • Public safety;
  • Law enforcement;
  • Public interest law services;
  • Early childhood education (including licensed or regulated health care, Head Start, and state-funded pre-kindergarten);
  • Public service for individuals with disabilities and the elderly;
  • Public health (including nurses, nurse practioners, nurses in a clinical setting, and full-time professionals engaged in health care practioner occupations and health care support occupations);
  • Public education;
  • Public library services; and
  • School library or other school-based services.

Is the public service loan forgiveness benefit taxable?

According to Finaid.org, this is not a taxable benefit:

"Public service loan forgiveness is not taxable under section 108(f) of the Internal Revenue Code." 

How do I apply for this program?

According to IBRinfo.org:  

Public Service Loan Forgiveness (PSLF) has no official application at this time. However, if you're in the right kind of job and making the right kind of payments through the Direct Loan program, loan payments made as early as October 2007 could count towards the 120 payments that qualify you for PSLF. The earliest date you can be eligible for forgiveness is October 2017 (assuming you make 10 years of uninterrupted payments beginning with the first eligible payment date of October 2007).